ITEM 1. BUSINESS
GENERAL
Fonar Corporation, sometimes referred
to as the “Company” or “Fonar”, is a Delaware corporation which was incorporated on July 17, 1978. Our address
is 110 Marcus Drive, Melville, New York 11747 and our telephone number is 631-694-2929. Fonar also maintains a website at www.fonar.com.
Fonar provides copies of its filings with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K and amendments to
these reports to stockholders on request.
We conduct our business in two segments.
Our medical equipment segment is conducted directly through Fonar. Our physician management and diagnostic services segment is
conducted through our subsidiary Health Diagnostic Management, LLC (“HMCA”), also called Health Management Company of
America. HMCA provides management services, administrative services, billing and collection services, credentialing services, contract
negotiations, compliance consulting, purchasing, IT services, hiring, conducting interviews and managing personnel, storage of
medical records, office space, equipment, repair, maintenance service, and clerical and other non-medical personnel to medical
providers engaged in diagnostic imaging. In addition to acting as a management company, HMCA owns and operates four diagnostic
imaging facilities in Florida, where the corporate practice of medicine is permitted.
We restructured the corporate organization
of our physician and diagnostic services management segment of our business effective July 1, 2015. Imperial Management Services,
LLC (“Imperial”), a subsidiary which owned the assets used in the business of its parent, Health Management Corporation
of America (which is wholly-owned by Fonar), transferred those assets to Health Diagnostics Management, LLC (“HDM”),
which is another subsidiary of Health Management Corporation of America. As a result, going forward our physician and diagnostic
management business will be conducted entirely through HDM, which is operating under the assumed name Health Management Company
of America.
Fonar is engaged in the business of designing,
manufacturing, selling and servicing magnetic resonance imaging scanners, also referred to as “MRI” or “MR”
scanners, which utilize MRI technology for the detection and diagnosis of human disease, abnormalities, other medical conditions
and injuries. Fonar’s founders built the first MRI scanner in 1977 and Fonar introduced the first commercial MRI scanner in 1980.
Fonar is also the originator of the iron-core non-superconductive and permanent magnet MRI technology.
Fonar’s iron frame technology made Fonar
the originator of “open” MRI scanners. We introduced the first “open” MRI in 1980. Since that time we have
concentrated on further application of our “open” MRI, introducing most recently the Upright® Multi-Position™”
MRI scanner (also referred to as the “Upright®” or “Stand-Up®” MRI scanner) and the Fonar 360™
MRI scanner. The Fonar 360™ MRI is not presently being marketed.
See Note 17 to the Consolidated Financial
Statements for separate financial information regarding our medical equipment and physician and diagnostic management services
segments.
FONAR CORPORATION AND SUBSIDIARIES
FORWARD LOOKING STATEMENTS.
Certain statements made in this Annual
Report on Form 10-K are “forward-looking statements”, within the meaning of the Private Securities Litigation Reform
Act of 1995, regarding the plans and objectives of Management for future operations. Such statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking
statements are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based,
in part, on assumptions involving the expansion of business. These assumptions involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Annual Report will prove to be accurate. In light of the significant uncertainties inherent in our
forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person
that our objectives and plans will be achieved.
Among the risks and assumptions which
must now be taken into account is the COVID-19 virus, which adds additional uncertainties to future expectations. Although the
impact will be negative, the severity, duration and recurrence of new strains of the COVID-19 virus such as the Delta variant adds
a new dimension to the difficulties facing our business and the world economy in general.
THE UPRIGHT® MRI SCANNER
The Upright® MRI scanner is the product
we are presently promoting. The Upright® MRI (also known as the “Stand-Up® MRI”) is a “whole-body”
MRI, meaning it can be used to scan any part of the body. Unlike conventional recumbent MRI scanners, where the patient must lie
on his or her back, the Upright® MRI permits MRI scans to be taken in a weight-bearing state. Patients can be scanned while
standing, sitting, bending or lying down. This means that an abnormality or injury, such as a slipped disk, may be scanned in a
weight-bearing posture, which more often than not is the position in which patients experience pain. An adjustable bed allows patients
to stand, sit or lie on their backs, sides or stomachs. The Upright® MRI is by design a non-claustrophobic MRI scanner. We
have introduced the name “Upright®” as an alternative to “Stand-Up®” because of the multiplicity of
positions in which the patient may be scanned where the patient is not standing.
As of June 30, 2021, HMCA manages a total
of 39 MRI scanners. Twenty-five (25) MRI scanners are located in New York and fourteen (14) which are located in Florida. We believe
that the utilization of Fonar UPRIGHT® MRI scanning systems has been a significant factor in maintaining the patient volume
of the scanning facilities and our ability to cope with the effects of the COVID-19 pandemic. In addition, a new facility managed
by the Company has been opened in Pembroke Pines, Florida and a total of four additional MRI scanners were added in New York.
FONAR CORPORATION AND SUBSIDIARIES
MEDICAL EQUIPMENT SEGMENT
PRODUCTS
The Fonar Upright® MRI is a weight-bearing
whole-body open MRI system which enables positional MRI (pMRI®) applications. Operating at a magnetic field strength of 0.6
Tesla, the scanner is a powerful, diagnostically versatile and cost-effective open MRI that provides a broad range of clinical
capabilities and a complete set of imaging protocols. Patients can be scanned standing, bending, sitting, upright at an intermediate
angle and in the conventional recumbent position. This multi-positional MRI system accommodates an unrestricted range of motion
for flexion, extension, lateral bending, and rotation studies of the cervical (upper) and lumbar (lower) spine. Previously difficult
patient scanning positions can be achieved and compared using the system’s MRI-compatible, three-dimensional, motorized patient
handling system. The system’s lift and tilt functions deliver the targeted anatomical region to the center of the magnet. True
image orientation is assured, regardless of the rotation angle, via computer read-back of the table’s position.
There is considerable evidence that the
weight-bearing Upright® MRI provides medical benefits not duplicated by any other MRI scanner because patient positioning plays
a critical role in accurately detecting clinically significant pathology.
For instance, the Fonar Upright®
technology has demonstrated its key value on patients with the Arnold-Chiari Syndrome, which is believed to affect 200,000 to 500,000
Americans. In this syndrome, brain stem compression and subsequent severe neurological symptoms occur in these patients, when because
of weakness in the support tissues within the skull, the brain stem descends and is compressed and entrapped at the base of the
skull in the foramen magnum, which is the circular bony opening at the base of the skull where the spinal cord exits the skull.
The brain structures “entrapped” in Chiari Syndrome are the lowest lying structures of the brain, the tonsils of the
cerebellum. The Chiari Syndrome is therefore alternately named Cerebellar Tonsillar Ectopia (CTE) indicating the displacement (ectopia)
of these Cerebellar tonsils in this syndrome. Classic symptoms of the Chiari Syndrome include the “drop attack,” where
the patient unexpectedly experiences an explosive rush at the base of the brain which runs down the body to the extremities, causing
the patient to collapse in a temporary neuromuscular paralysis. These symptoms subside when the patient is lying down. Conventional
lie-down MRI scanners cannot make an adequate evaluation of the pathology since the patient’s pathology is most visible and the
symptoms are most acute when the patient is scanned in the upright weight-bearing position.
A publication in the Journal “Brain
Injury” (Brain Injury 2010, 24 (7-8) 988-994) of 1,200 neck pain patients reported that the fallen cerebellar tonsils of the
brain (CTE) were missed 75% of the time when the patient was scanned only in the recumbent position. It is critical to have an
image of the patient in an upright position so that the neurosurgeons can fully evaluate the brain stem and choose the most appropriate
surgical approach for an operative repair.
FONAR CORPORATION AND SUBSIDIARIES
The study was published by 10 authors
from distinguished universities in the United States and around the world. The study reported that Cerebellar Tonsillar Ectopia
Herniation (CTE) was missed 75% of the time when the patient was scanned lying down instead of upright. At the current rate of
1,000,000 automobile whiplash injuries in the U.S. per year, 750,000 patients each year would have the pathology responsible for
their symptoms go undetected if they were examined solely in a conventional recumbent-only MRI.
The Upright® MRI has also demonstrated
its value for patients suffering from scoliosis. Scoliosis patients typically have been subjected to routine x-ray exams for years
and must be imaged upright for an adequate evaluation of their scoliosis. Because the patient must be standing for the exam, an
x-ray machine has been the only modality that could provide that service. The Upright® MRI is the only MRI scanner that allows
the patient to stand during the MRI exam. Fonar has developed a new RF receiver and scanning protocol that for the first time allows
scoliosis patients to obtain diagnostic pictures of their spines without the risks of x-rays. A study by the National Cancer Institute
(2000) of 5,466 women with scoliosis reported a 70% increase in breast cancer resulting from 24.7 chest x-rays these patients received
on average in the course of their scoliosis treatment.
Other important new applications are
Upright® imaging of the pelvic floor and abdomen to image prolapses and inguinal hernias. Fonar has also developed the first
non-invasive method to image the prostate: the patient simply sits on a flat, seat-like coil.
The Upright® MRI is also the world’s
most non-claustrophobic whole-body MRI scanner. Frequently, patients can simply walk into the magnet, stand or sit for their scans
and then walk out. The magnet’s front-open and top-open design provides an unprecedented degree of comfort because there is nothing
in front of the patient’s face except a large (42”) flat-screen TV that is mounted on the wall. The default position for the
bed is a tilt back of six degrees that minimizes patient motion. Special RF receiver coil fixtures, a patient seat, Velcro straps,
and transpolar stabilizing bars are also used to keep the patient comfortable and motionless throughout the scanning process.
Full-range-of-motion studies of the joints
in multiple directions are possible, an especially useful feature for sports injuries. Full range of motion cines, or movies, of
the lumbar spine can also be achieved under full body weight.
The Fonar Upright® MRI operates at
a significantly higher magnetic field strength than earlier open MRIs that preceded it, and, therefore, benefits from more of the
MRI image-producing signal needed to make high-quality MRI images.
Fonar maximizes image quality through
an optimal combination of image signal to noise (S/N) and contrast-to noise (C/N) ratios. Technical improvements incorporated into
the scanner design include increased image processing speed, high-S/N Organ Specific(TM) RF receiver coils, high performance front-end
electronics featuring high-speed, wide-dynamic-range analog-to-digital conversion and a miniaturized ultra-low-noise pre-amplifier,
high-speed automatic tuning, bandwidth-optimized pulse sequences, multi-bandwidth sequences, and off-center FOV imaging capability.
FONAR CORPORATION AND SUBSIDIARIES
In addition to the signal-to-noise ratio,
however, a major determinant of image quality that must be considered is contrast, the quality that enables reading physicians
to clearly distinguish adjacent, and sometimes minute, anatomical structures from their surroundings. This quality is measured
by contrast-to-noise ratios (C/N). Unlike S/N, which increases with increasing field strength, relaxometry studies have shown that
C/N peaks in the mid-field range and actually falls off precipitously at higher field strengths. The Upright® MRI scanners
operate squarely in the optimum C/N range.
FONAR’s scanners are equipped with a
variety of software features which enhance versatility and diagnostic capability. For example, SMART™ scanning allows for
same-scan customization of multi-slice scans, each slice with its own thickness, resolution, angle and position. This is an important
feature for scanning parts of the body that include small-structure sub-regions requiring finer slice parameters. There is also
Multi-Angle Oblique™ (MAO) imaging, and oblique imaging.
During fiscal 2021, sales of our Upright®
MRI scanners accounted for approximately 0.8% of our total revenues and 10.0% of our medical equipment revenues, as compared to
0.1% of total revenues and 1.0% of medical equipment revenues in fiscal 2020.
FONAR’s principal marketing efforts with
respect to its products have been focused on the Upright® MRI, which we believe is a particularly unique product. It is the
only MRI scanner which is both open and allows for weight-bearing imaging. We expect to continue our focus on the Upright®
MRI in the immediate future.
The materials and components used in
the manufacture of our products (circuit boards, computer hardware components, electrical components, steel and plastic) are generally
available at competitive prices. We have not had difficulty acquiring such materials.
PRODUCT MARKETING
The principal markets for the Company’s
scanners are private diagnostic imaging centers and hospitals.
We use internal personnel and independent
manufacturer’s representatives for domestic and foreign markets. None of Fonar’s competitors are entitled or been licensed to make
the Fonar Upright® MRI scanner.
Fonar’s Website includes interactive
product information for interested customers.
During fiscal 2021 and previously sales
were made to foreign customers. CEO Matthias Schulz of Medserena, Fonar’s principal foreign sales representative and distributor,
has said, “The large number of requests coming from our physicians in Germany are arising because of the special medical need
for FONAR’s unique technology. This is in spite of an intensely active MRI market in Germany, where there are already many conventional
lie-down MRIs installed.”
FONAR CORPORATION AND SUBSIDIARIES
Fonar’s marketing strategy has been designed
to reach key purchasing decision makers with information concerning the Upright® MRI. This has led to many inquiries and to
some sales of the Upright® MRI scanner and is intended to increase Fonar’s presence in the medical market. Fonar focuses on
four target audiences: neurosurgeons, orthopaedic surgeons, radiologists and physicians in general.
1)
|
|
Neurosurgeons
and Orthopaedic Surgeons: These are the surgeons who can most benefit from the superior diagnostic benefits of the Fonar Upright®
MRI with its Multi-Position® MRI diagnostic ability.
|
|
|
|
2)
|
|
Radiologists:
These physicians can now offer a new Multi-Position®, weight-bearing MRI modality to their referring physicians.
|
|
|
|
3)
|
|
All Physicians:
The vast number of doctors who send patients for MRI’s need to be aware of the diagnostic advantages of the Fonar Upright®
Multi-Position™.
|
Our advertising for Fonar and HMCA re-enforces
the unique value provided by Fonar MRI scanners. We have increased internet awareness of our product by driving patient traffic
to the Upright® scanning centers we manage via the Fonar website (www.fonar.com) as well as by creating Websites for each HMCA
location. These websites give prospective customers of Upright® MRI scanners a view of operating Upright® MRI centers and
highlight the benefits of using an Upright® MRI scanner. A complete list of the sites managed by HMCA can be found at HMCA’s
website, hmca.com.
Our marketing efforts, however, have
been compromised by the COVID-19 panademic and economic challenges felt worldwide as a result.
SERVICE AND UPGRADES FOR MRI SCANNERS
Our customer base of installed scanners
has been and will continue to be an additional source of income, independent of direct sales.
Income is generated from the installed
base in two principal areas, namely, service and upgrades. Service and maintenance revenues from our external installed base were
approximately $7.7 million in fiscal 2021 and $8.2 million in fiscal 2020. Our objective is to maintain service revenues at present
levels or better, based on the longevity of the technology, and the refurbishments and upgrades which keep the scanners competitive
with the latest techniques.
We also anticipate that our scanners
will result in upgrades income in future fiscal years. The potential for upgrades income, originates in the versatility and productivity
of the Upright® Imaging technology. New medical uses for MRI technology are constantly being discovered and are anticipated
for the Upright® Imaging technology as well. New features can often be added to the scanner by the implementation of little
more than versatile new software packages, which when coupled with hardware upgrades can add years of useful life to the scanner.
FONAR CORPORATION AND SUBSIDIARIES
RESEARCH AND DEVELOPMENT
During the fiscal year ended June 30,
2021, we incurred expenditures of $1,635,979, none of which were capitalized, on research and development, as compared to $2,025,376,
none of which were capitalized, during the fiscal year ended June 30, 2020.
Research and development activities have
focused principally on software improvements to the user interface of the MRI scanner. The Windows-based Sympulse™ platform
controls all of the functions of the Upright® scanner except those of the versatile, multi-position patient table. Separate,
dedicated, motion-control software is used to maneuver the Upright® bed, and development of this software is ongoing as well.
While software improvements to the user
interface are important in their own right, significant value is added to the MRI scanner by the modification of existing protocols
for examining various parts of the body, and the development of new protocols that utilize new underlying capabilities of the pulse
sequence software. Over time, FONAR users have become accustomed to the steady improvement in the recommended clinical protocols
that accompany new software releases. More significantly, in recent years we have seen increasing adoption of FONAR-recommended
clinical protocols over those developed on site. This is a testament to the superior image quality they produce in attractively
short scan times.
The development of clinically practical
scan protocols and software depends on close contact between research and development scientists and engineers, and end users.
That close contact is facilitated in part by the relationship with HMCA and the scanning centers. In addition to that collaboration,
R&D staff have pursued a variety of novel and Upright® MRI-specific research projects. It is anticipated that these will
ultimately lead to new applications that are made available to existing customers as upgrade add-ons to their machines. For example,
phase-contrast imaging techniques originally developed for angiography have recently been applied to cerebro-spinal fluid (CSF)
flow. Analysis of CSF flow in upright and recumbent postures may prove to be of significant value in the evaluation of a variety
of disorders.
BACKLOG
Our backlog of unfilled orders at September
15, 2021 was approximately $62,000, as compared to $457,000 at September 15, 2020. It is expected that the existing backlog of
orders will be filled within the 2022 fiscal year.
PATENTS AND LICENSE
We currently have numerous patents in
effect which relate to the technology and components of our MRI scanners. We believe that these patents, and the know-how we have
developed, are material to our business.
FONAR CORPORATION AND SUBSIDIARIES
One of our patents, issued in the name
of Dr. Damadian and licensed to Fonar, was United States patent No. 3,789,832, Apparatus and Method for Detecting Cancer in Tissue,
also referred to in this report as the “1974 Patent”. The 1974 Patent was the first MRI patent issued by the United States
Patent Office. The development of our MRI scanners has been based upon the 1974 Patent, and we believe that the 1974 Patent was
the first of its kind to utilize MR to scan the human body and to detect cancer. The 1974 Patent was extended beyond its original
17-year term and expired in February, 1992.
We have significantly enhanced our patent
position within the industry and now possess a substantial patent portfolio which provides us, under the aegis of United States
patent law, “the exclusive right to make, use and sell” many of the scanner features which Fonar pioneered and which
are now incorporated in most MRI scanners sold by the industry. As of June 30, 2021, 220 patents had been issued to Fonar, and
approximately 11 patents were pending. A number of Fonar’s existing patents specifically relate to protecting Fonar’s position
in the Upright MRI market. The patents further enhance Dr. Damadian’s pioneer patent, the 1974 Patent, that initiated the MRI industry
and provided the original invention of MRI scanning. The terms of the patents in Fonar’s portfolio extend to various times.
We also have patent cross-licensing agreements
with other MRI manufacturers. We have not licensed, however, any technology relating to Upright® MRI scanning.
PRODUCT COMPETITION
MRI SCANNERS
MRI takes advantage of the nuclear magnetic
resonance signal elicited from the body’s tissues and the exceptional sensitivity of this signal for detecting disease discovered
by Fonar. Much of the serious disease of the body occurs in the soft tissue of vital organs. The maximum contrast available by
x-ray with which to discriminate disease is 4%. Brain cancers differ from surrounding healthy brain by only 1.6% while the contrast
in the brain by MRI is 25 times greater at 40%. X-ray contrasts among the body’s soft tissues are maximally 4%. Their contrast
by MRI is 32.5 times greater (130%).
The soft tissue contrasts with which
to distinguish cancers on images by MRI are up to 180%. In the case of cancer these contrasts can be even more marked making cancers
readily visible and detectable anywhere in the body. This is because the nuclear resonance signals from the body’s normal soft
tissue vital organs, differ so dramatically from each other (e.g. small intestine 257 milliseconds, brain 595 milliseconds). Liver
cancer and healthy liver signals differ by 180% for example.
A majority of the MRI scanners in use
in hospitals and outpatient facilities and at mobile sites in the United States are based on high field (1.5 - 3.0 Tesla) air core
superconducting magnet technology.
FONAR CORPORATION AND SUBSIDIARIES
Open MRIs manufactured by Fonar’s competitors,
are recumbent-only machines based on Fonar’s original iron-frame vertical magnetic field magnet design. These systems have been
manufactured and sold by many of our largest competitors over the years. They generally operate at low field strengths (0.2 - 0.35
Tesla). Their prevalence in the marketplace has led to the perception in the medical community that Open MRIs are useful only for
anxious and claustrophobic patients, that the Open MRI’s image quality is poor, and that the scan times are long. Recently our
competitors have introduced higher field strength Open MRI products (0.5 – 1.2 Tesla). Significantly better imaging performance
(especially at 1.2 T) compared to the low field strength systems, is beginning to change that perception. However, Fonar continues
to maintain its competitive advantage at 0.6 Tesla due to our front-open non-claustrophobic configuration in which there is nothing
in front of the patient’s face, and our unique ability to scan patients in weight-bearing positions. It is also noteworthy that
our horizontal transaxial magnetic field allows the Upright MRI, in contrast to the recumbent-only Open MRIs, to use the same flat
planar-style radiofrequency receiver coil as the high-field MRI systems to image the lumbar and thoracic spine.
The Upright MRI uses the same configuration
RF receiver coil as a high-field MRI system to image the spine other Open MRIs cannot do this. (This is because of the rule in
MRI that the axis of symmetry of the RF receiver coil should be perpendicular to the direction of the main magnetic field). The
upright patient sits comfortably with his back against a flat (“planar”) RF receiver coil in our horizontal transaxial
magnetic field. In contrast, the vertical magnetic field in the recumbent-only Open MRI precludes the use of this type of receiver
coil.
Relative to the high-field systems, the
Upright MRI has two major competitive advantages:
Sometimes patient positioning is more
consequential than a small increase in the image resolution and decrease in the scan time. As it is critical for physicians to
not “miss” anything in the images, they recognize that the position-dependent pathology visualized with the Upright MRI
will be invisible (“missed”) if their patients are scanned at a higher field strength.
Image artifacts arising from metal implants
such as surgical screws are diminished with the 0.6 Tesla Upright MRI compared to those from the high-field MRIs. It is well known
that such artifacts get smaller as the MRI magnet’s field strength is reduced, so the anatomy adjacent to implanted hardware will
be less obscured with the Upright MRI. This is particularly valuable for surgeons referring their postoperative patients for diagnostic
imaging studies.
Fonar faces competition within the MRI
industry from such firms as General Electric Company, Philips N.V., Toshiba Corporation, Hitachi Corporation and Siemens A.G. Most
competitors have marketing and financial resources more substantial than those available to us. They have in the past, and may
in the future, heavily discount the sales price of their scanners. Such competitors sell both high field air core superconducting
MRI scanners and iron frame products. Fonar’s original iron frame design, ultimately imitated by Fonar’s competitors to duplicate
Fonar’s origination of “Open” MRI magnets, gave rise to current patent protected Upright® MRI technology with the
result that Fonar today is the unique and only supplier of the highest field MRI magnets (0.6 Tesla) that are not superconducting,
do not use liquid helium and are not therefore susceptible to severe consequences and downtime cause by a system quench.
FONAR CORPORATION AND SUBSIDIARIES
The iron frame, because it controls the
magnetic lines of force and places them where wanted and removes them from where not wanted, provides a more versatile magnet design
than is possible with air core magnets. Air core magnets contain no iron but consist entirely of turns of current carrying wire.
Fonar expects to be the leader in weight-bearing
and positional MRI for providing dynamic visualization of body parts including the spine and extremities.
OTHER IMAGING MODALITIES
Fonar’s MRI scanners also compete with
other diagnostic imaging systems, all of which are based upon the ability of energy waves to penetrate human tissue and to be detected
by either photographic film or electronic devices for presentation of an image on a display monitor. Three different kinds of energy
waves - X-ray, gamma and sound - are used in medical imaging techniques which compete with MRI medical scanning, the first two
of which involve exposing the patient to potentially harmful radiation. These other imaging modalities compete with MRI products
on the basis of specific applications.
X-rays are the most common energy source
used in imaging the body and are employed in three imaging modalities:
1.
|
Conventional X-ray systems, the oldest method of imaging, are typically used to image bones and teeth. The image resolution of adjacent structures that have high contrast, such as bone adjacent to soft tissue, is excellent, while the discrimination between soft tissue organs is poor because of the nearly equivalent penetration of x-rays.
|
2.
|
Computerized Tomography, also referred to as “CT”, systems couple computers to x-ray instruments to produce cross-sectional images of particular large organs or areas of the body. The CT scanner addresses the need for images, not available by conventional radiography, that display anatomic relationships spatially. However, CT images are generally limited to the transverse plane and cannot readily be obtained in the two other planes, sagittal and coronal. Improved picture resolution is available at the expense of increased exposure to x-rays from multiple projections. Furthermore, the pictures obtained by this method are computer reconstructions of a series of projections and, once diseased tissue has been detected, CT scanning cannot be focused for more detailed pictorial analysis or obtain a chemical analysis.
|
3.
|
Digital radiography systems add computer image processing capability to conventional x-ray systems. Digital radiography can be used in a number of diagnostic procedures which provide continuous imaging of a particular area with enhanced image quality and reduced patient exposure to radiation.
|
4.
|
Nuclear medicine systems, which are based upon the detection of gamma radiation generated by radioactive pharmaceuticals introduced into the body, are used to provide information concerning soft tissue and internal body organs and particularly to examine organ function over time.
|
FONAR CORPORATION AND SUBSIDIARIES
5.
|
Ultrasound systems emit, detect and process high frequency sound waves reflected from organ boundaries and tissue interfaces to generate images of soft tissue and internal body organs. Although the images are substantially less detailed than those obtainable with x-ray methods, ultrasound is generally considered harmless and therefore has found particular use in imaging the pregnant uterus.
|
X-ray machines, ultrasound machines,
digital radiography systems and nuclear medicine compete with the MRI scanners by offering significantly lower price and space
requirements. However, Fonar believes that the utility of the images produced by its MRI scanners is generally superior to the
utility of the images produced by those other methodologies.
GOVERNMENT REGULATION
FDA Regulation
The Food and Drug Administration in accordance
with Title 21 of the Code of Federal Regulations regulates the manufacturing and marketing of Fonar’s MRI scanners. The regulations
can be classified as either pre-market or post-market. The pre-market requirements include obtaining marketing clearance, proper
device labeling, establishment registration and device listing. Once the products are on the market, Fonar must comply with post-market
surveillance controls. These requirements include the Quality Systems Regulation, or “QSR”, also known as Current Good
Manufacturing Practices or CGMPs, and Medical Device Reporting, also referred to as MDR regulations. The QSR is a quality assurance
requirement that covers the design, packaging, labeling and manufacturing of a medical device. The MDR regulation is an adverse
event-reporting program.
Classes of Products
Under the Medical Device Amendments of
1976 to the Federal Food, Drug and Cosmetic Act, all medical devices are classified by the FDA into one of three classes. A Class
I device is subject only to general controls, such as labeling requirements and manufacturing practices; a Class II device must
comply with certain performance standards established by the FDA; and a Class III device must obtain pre-market approval from the
FDA prior to commercial marketing. Fonar’s products are Class II devices. Class II devices are subject to “General Controls”;
General Controls include:
1. Establishment registration of companies
which are required to register under 21 CFR Part 807.20, such as manufacturers, distributors, re-packagers and re-labelers.
2. Medical device listing with FDA of
devices to be marketed.
3. Manufacturing devices in accordance
with the Current Good Manufacturing Practices Quality System Regulation in 21 CFR Part 820.
4. Labeling devices in accordance with
labeling regulations in 21 CFR Part 801 or 809.
5. Submission of a Premarket Notification,
pursuant to 510(k), before marketing a device.
FONAR CORPORATION AND SUBSIDIARIES
In addition to complying with general
controls, Class II devices are also subject to special controls. Special controls may include special labeling requirements, guidance
documents, mandatory performance standards and post-market surveillance.
On October 3, 2000 Fonar received FDA
clearance for the Upright® MRI under the name “Indomitable”.
Premarketing Submission
Each person who wants to market Class
I, II and some III devices intended for human use in the U.S. must submit a 510(k) to FDA at least 90 days before marketing unless
the device is exempt from 510(k) requirements. A 510(k) is a pre-marketing submission made to FDA to demonstrate that the device
to be marketed is as safe and effective, that is, substantially equivalent, SE, to a legally marketed device that is not subject
to pre-market approval, PMA. Applicants must compare their 510(k) device to one or more similar devices currently on the U.S. market
and make and support their substantial equivalency claims.
The FDA is committed to a 90-day clearance
after submission of a 510(k), provided the 510(k) is complete and there is no need to submit additional information or data.
The 510(k) is essentially a brief statement
and description of the product. As Fonar’s scanner products are Class II products, there are no pre-market data requirements.
An investigational device exemption,
also referred to as IDE, allows the investigational device to be used in a clinical study pending FDA clearance in order to collect
safety and effectiveness data required to support the Premarket Approval, also referred to as PMA, application or a Premarket Notification
pursuant to 510(k), submission to the FDA. Clinical studies are most often conducted to support a PMA.
For the most part, however, we have not
found it necessary to utilize IDE’s. The standard 90 day clearance for our new MRI scanner products classified as Class II products
makes the IDE unnecessary, particularly in view of the time and effort involved in compiling the information necessary to support
an IDE.
Quality System Regulation
The Quality Management System is applicable
to the design, manufacture, administration of installation and servicing of magnetic resonance imaging scanner systems. The FDA
has authority to conduct detailed inspections of manufacturing plants, to establish Good Manufacturing Practices which must be
followed in the manufacture of medical devices, to require periodic reporting of product defects and to prohibit the exportation
of medical devices that do not comply with the law.
FONAR CORPORATION AND SUBSIDIARIES
Medical Device Reporting Regulation
Manufacturers must report all MDR reportable
events to the FDA. Each manufacturer must review and evaluate all complaints to determine whether the complaint represents an event
which is required to be reported to FDA. Section 820.3(b) of the Quality Systems regulation defines a complaint as, “any written,
electronic or oral communication that alleges deficiencies related to the identity, quality, durability, reliability, safety, effectiveness,
or performance of a device after it is released for distribution.”
A report is required when a manufacturer
becomes aware of information that reasonably suggests that one of their marketed devices has or may have caused or contributed
to a death, serious injury, or has malfunctioned and that the device or a similar device marketed by the manufacturer would be
likely to cause or contribute to a death or serious injury if the malfunction were to recur.
Malfunctions are not reportable if they
are not likely to result in a death, serious injury or other significant adverse event experience.
A malfunction which is or can be corrected
during routine service or device maintenance still must be reported if the recurrence of the malfunction is likely to cause or
contribute to a death or serious injury if it were to recur.
We have established and maintained written
procedures for implementation of the MDR regulation. These procedures include internal systems that:
provide
for timely and effective identification, communication and evaluation of adverse
events;
provide
a standardized review process and procedures for determining whether or not an
event
is reportable; and
provide
procedures to insure the timely transmission of complete reports.
These procedures also include documentation
and record keeping requirements for:information that was evaluated to determine if an event was reportable;
all medical
device reports and information submitted to the FDA;
any information
that was evaluated during preparation of annual certification reports; and
systems
that ensure access to information that facilitates timely follow up and inspection by
FDA.
FDA Enforcement
FDA may take the following actions to
enforce the MDR regulation:
FONAR CORPORATION AND SUBSIDIARIES
FDA-Initiated or Voluntary Recalls
Recalls are regulatory actions that remove
a hazardous, potentially hazardous, or a misbranded product from the marketplace. Recalls are also used to convey additional information
to the user concerning the safe use of the product. Either FDA or the manufacturer can initiate recalls.
There are three classifications, i.e.,
I, II, or III, assigned by the Food and Drug Administration to a particular product recall to indicate the relative degree of health
hazard presented by the product being recalled.
Class I
Is a situation in which there is a reasonable
probability that the use of, or exposure to, a violative product will cause serious adverse health consequences or death.
Class II
Is a situation in which use of, or exposure
to, a violative product may cause temporary or medically reversible adverse health consequences or where the probability of serious
adverse health consequences is remote.
Class III
Is a situation in which use of, or exposure
to, a violative product is not likely to cause adverse health consequences.
Fonar has initiated six voluntary recalls.
Five of the recalls were Class II and one was Class III. The recalls involved making minor corrections to the product in the field.
Frequently, corrections which are made at the site of the device are called field corrections as opposed to recalls.
Civil Money Penalties
The FDA, after an appropriate hearing,
may impose civil money penalties for violations of the FD&C Act that relate to medical devices. In determining the amount of
a civil penalty, FDA will take into account the nature, circumstances, extent, and gravity of the violations, the violator’s ability
to pay, the effect on the violator’s ability to continue to do business, and any history of prior violations.
Warning Letters
FDA issues written communications to
a firm, indicating that the firm may incur more severe sanctions if the violations described in the letter are not corrected. Warning
letters are issued to cause prompt correction of violations that pose a hazard to health or that involve economic deception. The
FDA generally issues the letters before pursuing more severe sanctions.
FONAR CORPORATION AND SUBSIDIARIES
Seizure
A seizure is a civil court action against
a specific quantity of goods which enables the FDA to remove these goods from commercial channels. After seizure, no one may tamper
with the goods except by permission of the court. The court usually gives the owner or claimant of the seized merchandise approximately
30 days to decide a course of action. If they take no action, the court will recommend disposal of the goods. If the owner decides
to contest the government’s charges, the court will schedule the case for trial. A third option allows the owner of the goods to
request permission of the court to bring the goods into compliance with the law. The owner of the goods is required to provide
a bond or, security deposit, to assure that they will perform the orders of the court, and the owner must pay for FDA supervision
of any activities by the company to bring the goods into compliance.
Citation
A citation is a formal warning to a firm
of intent to prosecute the firm if violations of the FD&C Act are not corrected. It provides the firm an opportunity to convince
FDA not to prosecute.
Injunction
An injunction is a civil action filed
by FDA against an individual or company. Usually, FDA files an injunction to stop a company from continuing to manufacture, package
or distribute products that are in violation of the law.
Prosecution
Prosecution is a criminal action filed
by FDA against a company or individual charging violation of the law for past practices.
Foreign and Export Regulation
We obtain approvals as necessary in connection
with the sales of our products in foreign countries. In some cases, FDA approval has been sufficient for foreign sales as well.
Our standard practice has been to require either the distributor or the customer to obtain any such foreign approvals or licenses
which may be required.
Legally marketed devices that comply
with the requirements of the Food Drug & Cosmetic Act require a Certificate to Foreign Government issued by the FDA for export.
Other devices that do not meet the requirements of the FD&C Act but comply with the laws of a foreign government require a
Certificate of Exportability issued by the FDA. All products which we sell have FDA clearance and would fall into the first category.
FONAR CORPORATION AND SUBSIDIARIES
Foreign governments have differing requirements
concerning the import of medical devices into their respective jurisdictions. The European Union, also referred to as EU, has some
essential requirements described in the EU’s Medical Device Directive, also referred to as MDD. In order to export to one of these
countries, we must meet the essential requirements of the MDD and any additional requirements of the importing country. The essential
requirements are similar to some of the requirements mandated by the FDA. In addition the MDD requires that we enlist a Notified
Body to examine and assess our documentation, a Technical Construction File, and verify that the product has been manufactured
in conformity with the documentation. The notified body must carry out or arrange for the inspections and tests necessary to verify
that the product complies with the essential requirements of the MDD, including safety performance and Electromagnetic Compatibility,
also referred to as EMC. Also required is a Quality System, ISO-13485, assessment by the Notified Body. We were approved for ISO
13485 certification for its Quality Management System in April, 2003.
We received clearance to sell the Upright®
MRI scanners in the EU in May, 2002.
Other countries require that their own
testing laboratories perform an evaluation of our devices. This requires that we must bring the foreign agency’s personnel to the
USA to perform the evaluation at our expense before exporting.
Some countries, including many in Latin
America and Africa, have very few regulatory requirements, beyond FDA clearance.
To date, Fonar has been able to comply
with all foreign regulatory requirements applicable to its export sales.
PHYSICIAN AND DIAGNOSTIC SERVICES MANAGEMENT
BUSINESS
Health Diagnostics Management, LLC (HDM)
is owned by Health Management Corporation of America (70%) and investors (30%). Health Management Corporation of America is owned
100% by Fonar Corporation.
HDM operates under the assumed name “Health
Management Company of America” (“HMCA”).
The combined business (HDM and Health
Management Corporation of America) will be referred to as “HMCA” for all periods before and after July 1, 2015, unless
otherwise indicated.
HMCA provides comprehensive non-medical
management services to diagnostic imaging facilities. These services include administrative services, billing and collection services,
credentialing services, contract negotiations, compliance consulting, purchasing IT services, hiring, conducting interviews, training,
supervision and management of non-medical personnel, storage of medical records, office space, equipment, repair maintenance services,
accounting, assistance with compliance matters and the development and implementation of practice growth and marketing strategies.
FONAR CORPORATION AND SUBSIDIARIES
As of June 30, 2021, HMCA managed a total
of 39 MRI scanners of which twenty-five (25) scanners are located in New York and 14 scanners are located in Florida. For the 2021
fiscal year, the revenues HMCA recognized from the MRI facilities has increased to $80.9 million from $77.2 million in fiscal 2020.
Five of the facilities in Florida are owned by HMCA subsidiaries, where the corporate practice of medicine is permitted.
We believe the utilization of FONAR Upright®
MRI scanning systems, which are produced under the protection of our patents, accounts for the historically robust patient volume
at the scanning facilities and, most recently, our steady recovery from the effects of the COVID-19 pandemic. During fiscal 2021,
second MRI scanners were installed at our facilities in Islandia, New York and White Plains, New York and a new facility was installed
in Pembroke Pines, Florida. The Company also acquired an existing facility in West Yonkers, NY in March 2021.
HMCA GROWTH STRATEGY
HMCA’s growth strategy focuses on upgrading
and expanding the existing facilities it manages and expanding the number of facilities it either owns or manages for its clients,
including new sites. In connection with improving the performance of the facilities, we have added high field MRI scanners, extremity
scanners and x-ray machines to the Upright® MRI scanners at certain of the sites where such additional diagnostic imaging modalities
are expected to produce the greatest return. In addition we plan to install three new facilities in fiscal 2022: one in New York
and two in Florida.
PHYSICIAN AND DIAGNOSTIC MANAGEMENT SERVICES
HMCA’s services to the facilities it
manages encompass substantially all of their business operations. Each facility is controlled, however, not by HMCA, but by the
physician owner, or in the case of the four Florida sites owned by HMCA subsidiaries, by the medical director. All medical services
are performed by physicians and other medical personnel under the physician-owner’s supervision. HMCA is the management company
and performs services of a non-medical nature. These services include:
1. Offices and Equipment. HMCA identifies,
negotiates leases for and/or provides office space and equipment to its clients. This includes technologically sophisticated medical
equipment. HMCA also provides improvements to leaseholds, assistance in site selection and advice on improving, updating, expanding
and adapting to new technology.
2. Personnel. HMCA staffs all the non-medical
positions of its clients with its own employees, eliminating the client’s need to interview, train and manage non-medical employees.
HMCA processes the necessary tax, insurance and other documentation relating to employees.
FONAR CORPORATION AND SUBSIDIARIES
3. Administrative. HMCA assists in the
scheduling of patient appointments, purchasing of office and medical supplies and equipment and handling of reporting, accounting,
processing and filing systems. It prepares and files the physician portions of complex applications to enable its clients to participate
in managed care programs and to qualify for insurance reimbursement. HMCA assists the clients to implement programs and procedures
to ensure full and timely regulatory compliance and appropriate cost reimbursement under no-fault insurance and Workers’ Compensation
guidelines, as well as compliance with other applicable governmental requirements and regulations, including HIPAA and other privacy
requirements.
4. Billing and Collections. HMCA is responsible
for the billing and collection of revenues from third-party payors including those governed by No-Fault and Workers’ Compensation
statutes. HMCA is presently using a third party to perform its billing and collection services for its clients’ No-Fault and Workers’
Compensation scanning business.
5. Cost Saving Programs. Based on available
volume discounts, HMCA seeks to assist in obtaining favorable pricing for office and medical supplies, medical imaging film, equipment,
contrast agents, such as gadolinuim, and magnavist and other inventory for its clients.
6. Diagnostic Imaging and Ancillary Services.
HMCA can offer access to diagnostic imaging equipment through diagnostic imaging facilities it manages. The Company is expanding
the ancillary services offered in its network to include x-rays, and other MRI equipment such as high-field (1.5 or 3.0 Tesla magnet
strength) MRI scanners and extremity MRI scanners.
7. Marketing Strategies. HMCA is responsible
for developing and proposing marketing plans for its clients.
8. Expansion Plans. HMCA assists the
clients in developing expansion plans including the opening of new or replacement facilities where appropriate.
HMCA’s objective is to free physicians
from as many non-medical duties as is practicable, allowing physicians to spend less time on business and administrative matters
and more time practicing medicine.
The exceptions to this general model
of operation are five of the facilities located in Florida. These Florida facilities are owned by limited liability companies which,
as our subsidiaries, conduct their operations directly and bill and collect their fees from the patients and third party payors.
The facilities enter into contracts with
third party payors, including managed care companies. None of HMCA’s clients, however, participate in any capitated plans or other
risk sharing arrangements. Capitated plans are those HMO programs where the provider is paid a flat monthly fee per patient.
The management fees payable by the facilities
to HMCA are flat monthly fees. In fiscal 2020, the aggregate amount of management fees was $4,530,422 per month. In fiscal 2021,
the aggregate amount of management fees was $4,897,720 per month.
FONAR CORPORATION AND SUBSIDIARIES
Fees under the management agreements
are subject to adjustment by mutual agreement on an annual basis.
Dr. Damadian owns three HMCA-managed
MRI facilities in Florida. The fees for these three sites in Florida owned by Dr. Damadian are flat monthly fees which are subject
to adjustment by mutual agreement on an annual basis. In fiscal 2021, the aggregate monthly amount of management fees payable to
HMCA by these sites was $931,561 as compared to $897,745 in fiscal 2020.
The Florida facilities owned by HMCA
subsidiaries directly bill their patients or the patients’ insurance carriers. Patient fees net of provision for bad debts were
$23,307,389 in fiscal 2021 as compared to $22,495,260 in fiscal 2020.
HMCA contracts with an outside billing
company (located in Melville, New York) to perform billing and collection for their clients’ No-Fault and Workers’ Compensation
business. The fixed monthly fees were $85,000 for HMCA in fiscal 2020 and part of fiscal 2021. This contract was terminated as
of January 1, 2021. The Company also entered into a one year renewable agreement to provide IT services to the billing company
for a monthly fee of $23,884.
HMCA MARKETING
HMCA’s marketing strategy is to expand
the business and improve the facilities which it manages. HMCA is seeking to increase the number of locations of those facilities
where market conditions are promising and to promote growth of our clients’ and Florida subsidiaries’ patient volume and revenue.
DIAGNOSTIC IMAGING FACILITIES
Diagnostic imaging facilities managed
by HMCA provide diagnostic imaging services to patients referred by physicians. The facilities are operated in a manner which eliminates
the admission and other administrative inconveniences of in-hospital diagnostic imaging services. Imaging services are performed
in an outpatient setting by trained medical technologists under the direction of physicians. Following diagnostic procedures, the
images are reviewed by the interpreting physicians who prepare reports of these tests and their findings. The vast majority of
reports for the New York facilities are transcribed by HMCA personnel and the remainder are outsourced to professional transcription
services. Reports for the Florida facilities are outsourced to professional transcription services.
HMCA develops marketing programs and
educational programs in an effort to establish and maintain referring physician relationships for our clients and Florida subsidiaries.
Managed care providers are an important
factor in the diagnostic imaging industry. To further its position, HMCA is seeking to expand the imaging modalities offered at
its managed and owned diagnostic imaging facilities. Three facilities in New York and six facilities in Florida have two or more
MRI scanners. One facility in New York and two in Florida also perform X-rays. During fiscal 2020, a second MRI was installed at
our Ormond Beach, Florida facility and a new HMCA facility became operational in Pembroke Pines, Florida.
FONAR CORPORATION AND SUBSIDIARIES
REIMBURSEMENT
HMCA’s clients receive reimbursements
for their services through Medicare, Medicaid, managed care, private commercial insurance, third party administrators, Workers’
Compensation, No-Fault and other insurance.
Medicare
The Medicare program provides reimbursement
for hospitalization, physician, diagnostic and certain other services to eligible persons 65 years of age and over and certain
other individuals. Providers are paid by the federal government in accordance with regulations promulgated by the Department of
Health and Human Services, HSS, and generally accept the payment with nominal deductible and co-insurance amounts required to be
paid by the service recipient, as payment in full. Hospital inpatient services are reimbursed under a prospective payment system.
Hospitals receive a specific prospective payment for inpatient treatment services based upon the diagnosis of the patient.
Under Medicare’s prospective payment
system for hospital outpatient services, or OPPS, a hospital is paid for outpatient services on a rate per service basis that varies
according to the ambulatory payment classification group, or APC, to which the service is assigned rather than on a hospital’s
costs. Each year the Centers for Medicare and Medicaid Services, or CMS, publishes new APC rates that are determined in accordance
with the promulgated methodology.
Services provided in non-hospital based
freestanding facilities are paid under the Medicare Physician Fee Schedule, or MPFS. All of HMCA’s clients are presently in this
category. The MPFS is updated on an annual basis and sometimes modified more frequently.
We have experienced reimbursement reductions
for radiology services provided to Medicare beneficiaries, including reductions pursuant to the Deficit Reduction Act, or DRA.
CMS’ 2010 regulatory changes to the MPFS
included a downward adjustment to services primarily involving the technical component rather than the physician work component,
by adjusting downward malpractice payments for these services. These adjustments have been phased in over a four year period. For
our fiscal year ended June 30, 2021, Medicare revenues represented approximately 3.4% of the revenues for HMCA’s clients and subsidiaries
as compared to 3.8% for the fiscal year ended June 30, 2020.
FONAR CORPORATION AND SUBSIDIARIES
Medicaid
The Medicaid program is a jointly-funded
federal and state program providing coverage for low-income persons. In addition to federally-mandated basic services, the services
offered and reimbursement methods vary from state to state. In many states, Medicaid reimbursement is patterned after the Medicare
program; however, an increasing number of states have established or are establishing payment methodologies intended to provide
healthcare services to Medicaid patients through managed care arrangements. In fiscal 2021, approximately 0.09% of the revenues
of HMCA’s clients were attributable to Medicaid, as compared to 0.07% in fiscal 2020. Four of the Florida facilities (those owned
by HMCA subsidiaries) do not participate in Medicaid.
Managed Care and Private Insurance.
Health Maintenance Organizations, or
HMO’s, Preferred Provider Organizations, or PPOs, and other managed care organizations attempt to control the cost of healthcare
services by a variety of measures, including imposing lower payment rates, preauthorization requirements, limiting services and
mandating less costly treatment alternatives. Managed care contracting is competitive and reimbursement schedules in many cases
can be at or below Medicare reimbursement levels. Some managed care organizations have reduced or otherwise limited, and other
managed care organizations may reduce or otherwise limit, reimbursement in response to reductions in government reimbursement.
These reductions could have an adverse impact on our financial condition and results of operations. These reductions have been,
and any future reductions may be, similar to the reimbursement reductions previously proposed.
HMCA COMPETITION
The physician and diagnostic management
services field is highly competitive. A number of large hospitals have acquired medical practices and this trend may continue.
HMCA expects that more competition will develop. Many competitors have greater financial and other resources than HMCA.
With respect to the diagnostic imaging
facilities managed by HMCA, the outpatient diagnostic imaging industry is highly competitive. Competition focuses primarily on
attracting physician referrals at the local market level and increasing referrals through relationships with managed care organizations,
as well as emphasizing to potential referral sources the advantages of Upright® MRI scanning. HMCA believes that principal
competitors for the diagnostic imaging centers are hospitals and independent or management company-owned imaging centers. Competitive
factors include quality and timeliness of test results, ability to develop and maintain relationships with managed care organizations
and referring physicians, type and quality of equipment, facility location, convenience of scheduling and availability of patient
appointment times. HMCA believes that it will be able to effectively meet the competition in the outpatient diagnostic imaging
industry with the Fonar Upright® MRI scanners and strategically placed high field MRI scanners at its facilities.
FONAR CORPORATION AND SUBSIDIARIES
GOVERNMENT REGULATION APPLICABLE TO HMCA
FEDERAL REGULATION
The healthcare industry is highly regulated
and changes in laws and regulations can be significant. Changes in the law or new interpretation of existing laws can have a material
effect on our permissible activities, the relative costs associated with doing business and the amount of reimbursement by government
and other third-party payors.
Federal False Claims Act
The federal False Claims Act and, in
particular, the False Claims Act’s “qui tam” or “whistleblower” provisions allow a private individual to bring
actions in the name of the government alleging that a defendant has made false claims for payment from federal funds. After the
individual has initiated the lawsuit the government must decide whether to intervene in the lawsuit and to become the primary prosecutor.
If the government declines to join the lawsuit, the individual may choose to pursue the case alone, although the government must
be kept apprised of the progress of the lawsuit, and may intervene later. Whether or not the federal government intervenes in the
case, it will receive the majority of any recovery.
When an entity is determined to have
violated the federal False Claims Act, it must pay three times the actual damages sustained by the government, plus mandatory civil
penalties for each separate false claim and the government’s attorneys’ fees. Liability arises when an entity knowingly submits,
or causes someone else to submit, a false claim for reimbursement to the federal government. The False Claims Act defines the term
“knowingly” broadly, though simple negligence will not give rise to liability under the False Claims Act. Examples of
the other actions which may lead to liability under the False Claims Act are set forth below:
Failure to comply with the many technical
billing requirements applicable to our Medicare and Medicaid business.
Failure to comply with the
prohibition against billing for services ordered or supervised by a physician who is excluded from any federal healthcare program,
or the prohibition against employing or contracting with any person or entity excluded from any federal healthcare program.
Failure to comply with the
Medicare physician supervision requirements for the services we provide, or the Medicare documentation requirements concerning
physician supervision.
FONAR CORPORATION AND SUBSIDIARIES
The Fraud Enforcement and Recovery Act
of 2009 expanded the scope of the False Claims Act by, among other things, broadening protections for whistleblowers and creating
liability for knowingly retaining a government overpayment, acting in deliberate ignorance of a government overpayment or acting
in reckless disregard of a government overpayment. The healthcare reform bills in the form of the Patient Protection and Affordable
Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, “PPACA”) expanded on
changes made by the 2009 Fraud Enforcement and Recovery Act with regard to such “reverse false claims.” Under PPACA,
the knowing failure to report and return an overpayment within 60 days of identifying the overpayment or by the date a corresponding
cost report is due, whichever is later, constitutes a violation of the False Claims Act. HMCA and its clients have never been sued
under the False Claims Act and believe they are in compliance with the law.
Stark Law
Under the federal Self-Referral Law,
also referred to as the “Stark Law”, which is applicable to Medicare and Medicaid patients, and the self-referral laws
of various States, certain health practitioners, including physicians, chiropractors and podiatrists, are prohibited from referring
their patients for the provision of designated health services, including diagnostic imaging and physical therapy services, to
any entity with which they or their immediate family members have a financial relationship, unless the referral fits within one
of the specific exceptions in the statutes or regulations. The federal government has taken the position that a violation of the
federal Stark Law is also a violation of the Federal False Claims Act. Statutory exceptions under the Stark Law include, among
others, direct physician services, in-office ancillary services rendered within a group practice, space and equipment rental and
services rendered to enrollees of certain prepaid health plans. Some of these exceptions are also available under the State self-referral
laws. HMCA believes that it and its clients are in compliance with these laws.
Anti-kickback Regulation
We are subject to federal and state laws
which govern financial and other arrangements between healthcare providers. These include the federal anti-kickback statute which,
among other things, prohibits the knowing and willful solicitation, offer, payment or receipt of any remuneration, direct or indirect,
in cash or in kind, in return for or to induce the referral of patients for items or services covered by Medicare, Medicaid and
certain other governmental health programs. Under PPACA, knowledge of the anti-kickback statute or the specific intent to violate
the law is not required. Violation of the anti-kickback statute may result in civil or criminal penalties and exclusion from the
Medicare, Medicaid and other federal healthcare programs, and according to PPACA, now provides a basis for liability under the
False Claims Act. In addition, it is possible that private parties may file “qui tam” actions based on claims resulting
from relationships that violate the anti-kickback statute, seeking significant financial rewards. Many states have enacted similar
statutes, which are not limited to items and services paid for under Medicare or a federally funded healthcare program. Neither
HMCA nor its clients engage in this practice.
FONAR CORPORATION AND SUBSIDIARIES
In fiscal 2021, approximately 3.4% of
the revenues of HMCA’s clients were attributable to Medicare and 0.09% were attributable to Medicaid. In fiscal 2020, approximately
3.8% of the revenues of HMCA’s clients were attributable to Medicare and 0.07% were attributable to Medicaid.
Deficit Reduction Act (DRA)
On February 8, 2006, the President signed
into law the DRA. Effective January 1, 2007, the DRA provides that Medicare reimbursement for the technical component for imaging
services (excluding diagnostic and screening mammography) performed in freestanding facilities will be capped. Payment is the lesser
of the Medicare Physician Fee Schedule or the Hospital Outpatient Prospective Payment System (OPPS) rates. Implementation of these
reimbursement reductions contained in the DRA has had an adverse effect on our business. We have been able to counter this effect
by increasing our clients’ scan volumes through our vigorous marketing efforts and reducing our operating expenses.
The DRA also codified the reduction in
reimbursement for multiple images on contiguous body parts previously announced by CMS, the agency responsible for administering
the Medicare program. In November 2005, CMS announced that it would pay 100% of the technical component of the higher priced imaging
procedure and 50% of the technical component of each additional imaging procedure for imaging procedures involving contiguous body
parts within a family of codes when performed in the same session. CMS had indicated that it would phase in this 50% rate reduction
over two years, so that the reduction was 25% for each additional imaging procedure in 2006 and another 25% reduction in 2007.
However, for services furnished on or after July 1, 2010, the PPACA requires the full 50% reduction to be implemented.
Health Insurance Portability and Accountability
Act
Congress enacted the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, in part, to combat healthcare fraud and to protect the privacy and security
of patients’ individually identifiable healthcare information. HIPAA, among other things, amends existing crimes and criminal penalties
for Medicare fraud and enacts new federal healthcare fraud crimes, including actions affecting non-governmental healthcare benefit
programs by means of false or fraudulent representations in connection with the delivery of healthcare services is subject to a
fine or imprisonment, or potentially both. In addition, HIPAA authorizes the imposition of civil money penalties against entities
that employ or enter into contracts with excluded Medicare or Medicaid program participants if such entities provide services to
federal health program beneficiaries. A finding of liability under HIPAA could have a material adverse effect on our business,
financial condition and results of operations.
FONAR CORPORATION AND SUBSIDIARIES
Further, HIPAA requires healthcare providers
and their business associates to maintain the privacy and security of individually identifiable protected health information (“PHI”).
HIPAA imposes federal standards for electronic transactions, for the security of electronic health information and for protecting
the privacy of PHI. The Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), signed
into law on February 17, 2009, dramatically expanded, among other things, (1) the scope of HIPAA to now apply directly to “business
associates,” or independent contractors who receive or obtain PHI in connection with providing a service to a covered entity,
(2) substantive security and privacy obligations, including new federal security breach notification requirements to affected individuals,
DHHS and prominent media outlets, of certain breaches of unsecured PHI, (3) restrictions on marketing communications and a prohibition
on covered entities or business associates from receiving remuneration in exchange for PHI, and (4) the civil and criminal penalties
that may be imposed for HIPAA violations, increasing the annual cap in penalties from $25,000 to $1.5 million per occurrence. In
2013 additional legal requirements were adopted to provide further protection for PHI.
In addition, many states have enacted
comparable privacy and security statues or regulations that, in some cases, are most stringent than HIPAA requirements. In those
cases it may be necessary to modify our operations and procedures to comply with the more stringent state laws, which may entail
significant and costly changes for us. We believe that we are in compliance with such state laws and regulations. However, if we
fail to comply with applicable state laws and regulations, we could be subject to sanctions.
We believe that we are in compliance
with the current HIPAA requirements, as amended by HITECH, together with other legislation and regulations, and comparable state
laws, but we anticipate that we may encounter certain costs associated with future compliance. Moreover, we cannot guarantee that
enforcement agencies or courts will not make interpretations of the HIPAA standards that are inconsistent with ours, or the interpretations
of our contracted radiology practices or their affiliated physicians. A finding of liability under the HIPAA standards may result
in significant criminal and civil penalties. Noncompliance also may result in exclusion from participation in government programs,
including Medicare and Medicaid. These actions could have a material adverse effect on our business, financial condition, and results
of operations.
Civil Money Penalty Law and Other Federal
Statutes
The Civil Money Penalty, or CMP, law
covers a variety of practices. It provides a means of administrative enforcement of the anti-kickback statute, and prohibits false
claims, claims for medically unnecessary services, violations of Medicare participating provider or assignment agreements and other
practices. The statute gives the Office of Inspector General of the HHS the power to seek substantial civil fines, exclusion and
other sanctions against providers or others who violate the CMP prohibitions.
In addition, in 1996, Congress created
a new federal crime: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits
knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of
this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs such as the Medicare
and Medicaid programs.
FONAR CORPORATION AND SUBSIDIARIES
Certificates of Need
Some states require hospitals and certain
other healthcare facilities and providers to obtain a certificate of need, or CON, or similar regulatory approval prior to establishing
certain healthcare operations or services, incurring certain capital projects and/or the acquisition of major medical equipment
including MRI and PET/CT systems. We are not operating in any such states.
Patient Protection and Affordable Care
Act
On March 23, 2010, President Obama signed
into law healthcare reform legislation in the form of PPACA. The implementation of this law has had a significant impact on the
healthcare industry. Most of the provisions of PPACA are being phased in over time and can be conceptualized as a broad framework
not only to provide health insurance coverage to millions of Americans, but to fundamentally change the delivery of care by bringing
together elements of health information technology, evidence-based medicine, chronic disease management, medical “homes,”
care collaboration and shared financial risk in a way that will accelerate industry adoption and change. We are unable to predict
the full impact of PPACA at this time primarily due to the previous administration’s efforts to repeal and replace the PPACA, or
to utilize executive action to modify the Act’s provisions where possible.
State Regulation
In addition to the federal self-referral
law and federal Anti-kickback statute, many States, including those in which HMCA and its clients operate, have their own versions
of self-referral and anti-kickback laws. These laws are not limited in their applicability, as are the federal laws, to specific
programs. HMCA believes that it and its clients are in compliance with these laws.
Various States prohibit business corporations
from practicing medicine. Various States, including New York, also prohibit the sharing of professional fees or fee splitting.
Consequently, in New York HMCA leases space and equipment to clients and provides clients with a range of non-medical administrative
and managerial services for agreed upon fees. Under Florida law a business entity can bill patients and third party payors directly
if that entity is properly licensed through AHCA. All of the eight facilities in Florida are licensed healthcare clinics through
AHCA.
HMCA’s clients and subsidiaries generate
revenue from patients covered by no-fault insurance and workers’ compensation programs. For the fiscal year ended June 30, 2021
approximately 55.5% of our clients’ receipts were from patients covered by no-fault insurance and approximately 9.4% of our client’s
receipts were from patients covered by workers’ compensation programs. For the fiscal year ended June 30, 2020, approximately 56.7.%
of HMCA’s clients’ receipts were from patients covered by no-fault insurance and approximately 9.11% of HMCA’s clients’ receipts
were from patients covered by workers’ compensation programs. The foregoing numbers do not include payments from third party administrators.
In the event that changes in these laws alter the fee structures or methods of providing service, or impose additional or different
requirements, HMCA could be required to modify its business practices and services in ways that could be more costly to HMCA or
in ways that decrease the revenues which HMCA receives from its clients.
FONAR CORPORATION AND SUBSIDIARIES
Compliance Program
We maintain a program to monitor compliance
with federal and state laws and regulations applicable to the healthcare entities. The compliance program includes the adoption
of (i) Standards of Conduct for our employees and affiliates and (ii) a process that specifies how employees, affiliates and others
may report regulatory or ethical concerns. We believe that our compliance program meets the relevant standards provided by the
Office of Inspector General of the Department of Health and Human Services.
An important part of our compliance program
consists of conducting periodic audits of various aspects of our operations and that of the contracted radiology practices. We
also assist our clients with educational programs designed to familiarize them with the regulatory requirements and specific elements
of our compliance program.
HMCA believes that it and its clients
are in compliance with applicable Federal, State and local laws. HMCA does not believe that such laws will have any adverse material
effect on its business.
EMPLOYEES
Fonar and HMCA had approximately 495
employees as of September 24, 2021. This total number included employees engaged in production, customer support, research and
development, information technology, employees engaged in marketing and sales, billing and collection, legal and compliance matters,
as well as transcriptionists, Florida technologists, field service technicians and individuals in various administrative positions.
A significant number of employees were employed at the MRI facilities managed or owned by HMCA, primarily in administrative positions.